Journal of Political Risk, Vol. 2, No. 1, January 2014.

María Elena Labastida Tovar, Ph.D.
Universidad Anáhuac México Norte

Almendra Ortiz de Zárate, MsC.
Universidad Anáhuac México Norte

Lilianne Isabel Pavón, Ph.D.
Universidad Anáhuac México Norte

Priscilla A. Tacujan, Ph.D.
Corr Analytics, Inc.

Abstract

Remittance senders evaluate the costs and benefits of money transfer services. Two conditions are of paramount interest: low costs and accessibility of use for the sender and receiver. The use of mobile phones (a ubiquitous technology) for sending money, paying for services, and banking is increasingly seen not only as the best option for remittances, but the only one that can fulfill the two conditions above. Due to its ubiquitous nature, access to financial services through mobile phones is growing exponentially, expanding access to more consumers, and readily available to decrease the costs of transferring money globally. This study addresses the use of this ubiquitous technology in two emerging markets: Mexico and the Philippines. It evaluates the impact of the regulatory framework on mobile financial services to provide consumers with greater access to financial services.

Introduction

Financial inclusion policies seek to achieve a more inclusive financial system for the unbanked and underserved. Two global phenomena work together to make this possible: global remittance transfers and high adoption of mobile subscriptions.  Six billion people own a mobile phone, 2 billion have a bank account, and $400 billion in remittances were transferred globally in 2012. Mobile banking acts as a bridge between financial services and remittances. Indeed, an emergent frontier for investments in emerging markets is mobile banking that caters to the investment needs of investors on one hand, and to the banking needs of the unbanked and the underserved on the other.

The World Bank reports that $400 billion in remittances flowed to developing countries in 2012, a jump of 6.5% from the previous year.[1] It projects that the increase will continue to grow by 10.7%, to reach $534 billion in 2015.[2]  Among the highest recipients of remittances in 2012 were the Philippines and Mexico,[3] each receiving $24 billion, after India ($70 billion) and China ($66 billion). Remittances continue to play a major role in boosting the macro fundamentals of many countries, even as they improve the general well-being of the people. Specifically, remittances alleviate poverty and create opportunities for the formation of human capital and entrepreneurship, increase health and education expenditures, and improve access to information and communication technologies.[4]

Remittances are made possible by migrant workers who pursue economic opportunities in other countries.  According to the United Nations, there are 215 million migrants who live outside their countries of birth.[5] In the case of the Philippines, around 10 million Filipinos either live or work abroad, remitting $24 billion in 2012, which is equivalent to 10.7% of the country’s GDP.[6] To a significant extent, the money which migrant workers send home plays a critical role in sustaining their country’s economic growth as remittances increase the aggregate output and income. In the case of Mexico, there are 11.8 million Mexicans working in the United States.[7] Mexican remittances totalled US$22.4 billion in 2012, significantly impacting Mexico’s GDP growth (see Figure 1).[8]

While the World Bank projects an increase in remittances in the coming years, it also points to obstacles that may slow the transfers, such as unemployment in Europe, emerging negative social attitudes toward migrant workers in certain parts of the world, and high transmission costs. As of the third quarter of 2012, the cost of sending money from a donor country to a recipient country ranged from 7.5% to 12.4% (with Sub-Saharan Africa exhibiting the highest percentage among emerging markets).[9] In Mexico the remittance average cost ranges between US$11.20 and US$17.70, while in the Philippines the cost of sending money from the United States is 5.94%.[10]

According to a World Bank study, one of the remedies for lowering the costs is the use of the mobile phone. Its ubiquitous nature provides a tool for transferring money that is cheap and easily accessible.  About 90% of the world’s population has mobile phone coverage.[11]  Worldwide mobile phone penetration is soaring, with subscriptions increasing four times since 2009, to more than 6.8 billion at the end of 2012,[12] and mobile penetration rates at 128% in developed countries and 89% in developing countries.[13] The mass proliferation of mobile phones around the world presents a new delivery channel for basic financial services for the unbanked.[14]

In line with the financial inclusion policy of the World Bank that seeks to provide financial services to “the underserved and the financially excluded” (consisting of 2.7 billion adults in emerging markets),[15] mobile telephony offers a tool that can bridge the gap between financial services and mobile phone usage. The working poor, comprising 60% of the total labor force in emerging markets,[16] will particularly benefit from this financial arrangement. According to the International Fund for Agricultural Development, the use of mobile telephony for the access and use of financial services (money transfers, paying for services, making deposits, withdrawing money, consulting bank account balances, etc.) is particularly useful in rural areas where 30% to 40% of remittances are transferred.[17] It is also highly accessible to rural workers who, under the traditional banking system, would have to travel long distances to be able to reach financial services traditionally located in densely-populated urban areas.

However, because of regulatory and legal issues, the use of mobile phones for banking services has yet to be implemented in many parts of the world. For one, the overlap in the scope of regulatory oversight between the finance industry and the telecommunications industry has yet to be addressed. There is also the problem of international oversight for the use of mobile phones in banking and other financial services involving international transactions such as remittance transfers. Differing rules governing financial transactions between donor countries and recipient countries also give rise to diverse complications and challenges.

Organization of the Paper

This paper seeks to address the policy issue of financial inclusion and mobile financial services[18] in relation to its use on remittance transfers. We aim to examine its benefits and prospects, as well as problems and challenges involving its application. The paper is organized as follows: Section One provides a review of financial inclusion and mobile financial services, linking these concepts together to underscore the investment opportunities behind mobile banking.  Section Two focuses on untapped mobile financial services in Mexico and the Philippines. It also covers an analysis of the relationship between remittances and financial inclusion. Section Three offers a comparative evaluation of the Philippine and Mexican experiences in regard to the use of the mobile phone and the provision of financial services. This section highlights the challenges and opportunities ahead for both emerging economies. The concluding section offers policy recommendations.

1. Financial inclusion and mobile financial services: An investment gap that needs to be filled?

During the past five years, international financial organizations, such as the World Bank, have been setting guidelines for emerging economies on how to promote financial inclusion (FI) policies, work with national governments to bank the unbanked, and generate economic growth. Initially, financial inclusion referred to the access and use of bank services. But this definition has been broadened since telecommunication companies have adopted new services that provide alternative and cheaper ways to transfer money and pay for services. The Center for Financial Inclusion defines FI as a state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations.[19]

For the purposes of this paper, financial inclusion is defined as the increasing use of and access to financial services –not banking services only – to a broader number of consumers. The importance of FI lies in the positive effects it produces on economic growth[20] and in the way it diminishes inequity.[21] In other words, FI is a critical component in generating economic growth. In this context, during the last few years, recognized scholars have studied and measured different variables related to FI, such as financial education,[22] economic convergence,[23] and remittances,[24] among others, and provided evidence of correlation between them.

FI is designed to eliminate poverty, and the real challenge is to include almost half of the world’s population unfamiliar with the use of financial services due to their geographical conditions. Most rural communities are unprofitable for banks because of the low number of transactions and the high costs of establishing a bank branch, coupled with a lack of financial education on the part of the people. According to the World Bank,[25] 70% of the world’s population has no access to financial services, and 70% lives in emerging countries. Organizations like the Alliance for Financial Inclusion and the World Bank have been working together with national government institutions to design new mechanisms to enhance FI in those countries. As already stated, the purpose of this paper is to analyze and compare the experiences of Mexico and the Philippines in financial inclusion services, given that they share similar experiences with remittance transfers and the rise of technologies for FI, but with rather contrasting experiences when it comes to access to and use of financial services as Mexico is still at an incipient stage,[26] compared to the Philippines and other emerging economies in Latin America and the rest of the world.[27]

Investors are viewing the integration of financial services into mobile phone usage in emerging markets as the next frontier for investment opportunities inasmuch as about 900 million people will spend about $1 trillion in the global mobile payment market by 2015.[28] Indeed, as far as financial transaction opportunities in developing countries are concerned, the market remains largely untapped.

The ubiquitous technology of mobile telephony is an effective tool for financial inclusion in emerging markets due to multiple advantages that it provides to the unbanked. Aside from offering financial services to the wide-based pyramid of consumers, it lowers costs of financial transactions, improves security (allowing the monitoring of financial transactions), increases banking accessibility to the many, generates jobs and business opportunities, and improves conditions for businesses to grow.[29]

According to Harvard Business professor, Sunil Gupta, 6 billion of 7 billion people in the world have mobile phones, but only 2 billion have bank accounts.[30] The inverse relationship between high adoption of mobile phones and the low number of bank accounts is most evident in emerging markets like Bangladesh, where 57% of its total population of 150 million have a mobile phone but only 13% have bank accounts, or India where 900 million have mobile phones but only 250 million have bank accounts.[31]

In the Philippines, where 99% of people own a mobile phone,[32]  8 of 10 heads of households do not have bank accounts.[33] Philippine monetary officials have been concerned about Filipinos’ spending habits, exhorting the banking sector to teach customers about the value of saving. In Mexico, 86.9% (97.6 million) of 112 million inhabitants are mobile phone subscribers, but only 38% (42.4 million) of the population use a bank product directly.[34]

2. Remittances and financial inclusion in emerging markets: the Philippines and Mexico

2.1 Philippines: An economic overview

The strength of macroeconomic fundamentals in the Philippines led analysts such as HSBC in its Asian Economics Quarterly report to project an increase in the Philippines’ gross domestic product (GDP) of 6.4% in 2013.[35] Last year, with its economic growth at 6.6%, the Philippines performed better than its ASEAN peers. The growth was driven largely by robust private consumption (which comprised 70% of the country’s GDP), steady remittances, and strong government spending.[36] The country’s investment credit rating recently obtained an upgrade from three prestigious international rating companies — Standard & Poor, Fitch Ratings, and Moody’s, enabling the country to substantially lower interest payments on its debts. As of 2012, it had $70 billion in reserves.

The investment environment of the Philippines is robust given that its international business reputation is improving. The Philippine government also boasts of sound fiscal management and anti-corruption measures to lure investors into the country. With a highly-skilled labor force, youthful population, and huge market, domestic and foreign investors find the investment environment in the Philippines attractive and profitable. The country’s stock market was up by 27% between May 2012 and May 2013, which is “stronger than any other market in Southeast Asia,” according to the Wall Street Journal in May 2013.[37]

An increase in government spending made possible an increase in revenue-collection. This was due largely to improved tax administration. Because of this, total tax revenues for 2012 grew by 13.2%. However, according to analysts, it is the money sent home by overseas workers and the rise of call centers that “serve as the long-term stabilizers relatively unhindered by a sagging global economy.”[38] Since 70% of the Philippine economy is from consumption, analysts say that remittances are the key driving force behind it.

Despite these strong economic fundamentals, analysts argue that the Philippine economy has real weaknesses. For one, growth has not translated into jobs. The National Statistics Office reports that the 2013 unemployment rate in the country was 7.5% (a jump from 6.9% in 2012), and the underemployment rate (part-time work) was 19.2%, despite an increase in GDP by 6.8% in 2012.[39] Analysts also say that the economy is too dependent on the global economy, especially remittances. Poor infrastructure, corruption, and unclear investment rules hinder the flow of foreign direct investment (FDI) to the country. Investors are also wary of restrictive economic provisions in the 1987 Philippine Constitution that limit foreign investment and foreign ownership.[40]

These restrictive provisions cover public utilities, including telecommunication companies. While the telecommunications industry in the Philippines was deregulated in the 1990s by former President Fidel Ramos (Republic Act No. 7925),[41] Filipino economists argue that opening the industry to foreign competition will further improve performance and lower costs for consumers. They also want companies to level the playing field by not engaging in monopolistic control. The recent move by the country’s largest company, Philippine Long Distance Telephone, to merge with Digital Telecommunications Philippines Inc., prompted President Benigno Aquino to order an inquiry into whether the merger had gained “undue advantage” over other industry players.[42]

2.2  Remittances in the Philippines

As mentioned earlier, approximately 10 million Filipinos either live or work abroad, remitting $24 billion in 2012 (10.7% of the country’s GDP).[43] As of August 2013, the Central Bank of the Philippines (Bangko Sentral ng Pilipinas) reports that the Philippines received $11.8 billion in remittances, an increase of 6.2% from last year.[44] BSP projected a growth in remittance transfers by 5% in 2013 from the previous year’s $21.39 billion.[45]

Remittances account for 10 percent of the Philippine economy. They fuel consumer spending, which boosts the country’s economic growth. The Bangko Sentral ng Pilipinas conducted the Quarterly Consumer Expectations Survey during the first quarter of 2013. Of 464 households surveyed, 96.6% spent remittances on food, 67.2% spent remittances on education, 59.1% spent remittances on medical expenses, and 42.1% spent remittances on debt payments.[46] The percentage of overseas Filipino households that save a portion of their remittances increased to 42.5% from the prior quarter, which is much higher than the average savings rate of Filipino households.[47]

In 2012, remittances came mostly from countries such as the United States, Canada, Saudi Arabia, United Kingdom, Japan, Singapore, and United Arab Emirates.  According to the Philippine Overseas Employment Administration (POEA), there are 1,802,031 deployed overseas workers (up by 6.8 % from the previous year), the majority of whom are employed as service, production, technical workers, and professionals, in Saudi Arabia, UAE, Singapore, Hong Kong, and Qatar.[48] Since Filipino overseas workers have effectively diversified their locales, remittances as a whole are relatively invulnerable to regional economic crises.  Also, diaspora workers aggregate in occupations, such as health care, hospitality, and technical jobs that are relatively unaffected during an economic slowdown.

In terms of negative effects of remittance transfers, some economists argue that the Philippine dependence on remittances for its economic growth may not have a sustainable, long-term positive effect.  Also, a study conducted by the Department of Labor and Employment and Small Enterprises Research and Development Foundation (SERDEF) underscores two negative social effects of remittances: 1) they create a culture of dependence and non-productivity among recipients; and 2) remitted money leads to increased consumption, hence, to lack of savings and missed investments as recipients do not have a high valuation of the hard-earned money sent to them by their relatives working abroad.[49] To address these challenges, the Philippine government and their counterparts are offering a series of financial literacy training programs to migrant workers and their families.

2.3 Mexico: An Economic Overview

The global financial crisis that began in the United States in 2008 had adverse effects on the Mexican economy due to its strong ties to the US.  About 80% of Mexico’s total exports go to the United States.[50]  In 2009, Mexico’s Gross Domestic Product (GDP) contracted by 5.95%. Per capita income declined as a result of the crisis, and increasing unemployment throughout the country led to growth in the informal economy. The drop in remittances was most evident in 2009, which affected mainly low-income households. In addition, increasing violence after the recession led to investors’ uncertainty in some regions of the country and drove a consequent sharp decline in foreign direct investment flows. The impact was even deeper in the manufacturing industry, which is mostly located along the Mexico-United States border.

Economic improvements, such as strengthening the financial system, price stability, and fiscal policy responses to the recessive effects of the global financial crisis, have helped Mexico overcome the economic downturn and improve conditions since 2010, with increases in economic activity of 5.28% in 2010, 3.29% in 2011, and 3.92% in 2012.

Mexico’s recovery started in 2010, reaching around US$10,000 GDP per capita in September 2012. During this year, the Mexican economy registered a positive trend, converging toward levels consistent with the country’s productivity potential. However, Mexico’s potential to promote economic growth, increase productivity, and lower the poverty rate was limited without substantial and effective incentive structural reforms. The Mexican Congress, dominated by major political parties, has strongly opposed most of these structural reform proposals. Yet, during 2013, with the change of Administration, these reforms have been put in place, at least on paper. These reforms included the following: energy reforms in order to privatize some parts of the state oil monopoly Pemex; finance reforms to reorganize the finance public sector; education reforms to evaluate teachers in the public education system; telecommunication reforms to increase coverage and allow more competition in this activity; labor reforms to bring more flexibility to the labor market; and political reforms.

Economic growth depended largely on both domestic demand and recovery of exports.[51] However, the beginning of 2013 did not yield the expected results, and skepticism about economic growth set in. Investors were enthusiastic about Mexico’s economic potential at the start of 2013.[52] However, according to the median estimate from seven analysts surveyed by Bloomberg, the economy experienced only a 0.3 percent gain.[53]

Remittances totaled $22.44 billion in 2012, down 1.57 percent from 2011. Yet, remittances sent by Mexicans living abroad are the country’s second-largest source of foreign exchange and help cover the living expenses of millions of people.[54]

2.4 Remittances in Mexico

As in any other emerging economy, migration in Mexico is both an internal and external phenomenon. Internally, 20% of the Mexican population has lived outside their state of birth in 2011. When it comes to emigration, 98% of those who choose to live abroad settle in the United States. This section briefly discusses the evolution of migration in Mexico in order to understand the flow of remittances as well as their associated costs and impact on financial inclusion.

In 2012, 11.9 million people born in Mexico were living in the United States. It is worth noting that 21.7 million Mexicans of second and third generations also live in the United States (see figure 2). Until 2010, Mexican migrants in the United States have been increasing, but have since stagnated.[55]

 

In six of ten households receiving remittances since 1995, the links with people sending money from the neighboring country explains the presence of important diaspora networks among the United States Hispanic population.  Since 1996, Mexican migrant workers have increasingly sought employment in the service sector, from 53% in 1996 to 63% in 2013.  In contrast, the primary sector has lost its market share in total employment, from 12% to 5% during the same period, while the secondary sector has maintained a moderate stable participation from 35% to 31.8% during the same period. However, the 2008 crisis caused a significant decline in employment in the field of construction and energy.  Mexican immigrants received lower wages than did United States residents. Nevertheless, there has been a slight improvement in their earnings over the past 15 years (see figure 3).

The strong Mexican presence in the United States explains the exponential growth of remittances in recent decades. Mexico is the third-largest recipient of remittances after India and China, -followed by the Philippines and France. Mexicoreceived US$22.7 million in 2011. According to figures from Mexico’s Central Bank (BANXICO), between 1996 and 2006, remittances skyrocketed from US$4.56 billion to US$24.2 billion. Between 2000 and 2006, they tripled. In 2007, remittances totaled US$26.1 billion, falling 3.5% in 2008 and 15.5% in 2009, with a slight recovery of 7% in 2011 but a further decline in 2012 down to $ 22.4 billion (see figure 4).

The average amount of household remittances has remained in the range of US$310 to US$350 in the last 15 years (in 2012, it was US$313 dollars on average).The total number of remittances has increased by a factor of five from US$13.2 billion in 1996 to US$71.6 billion in 2012.[56]

Among the different ways of sending remittances to Mexico, wire transfer is the most popular, accounting for 97.41% in number of services in 2012 against 51.49% in 1995, according to Mexico´s Central Bank (see Figure 5).[57]

 

The average remittance in 2012 was US$313 dollars and was sent through the following services: money orders (with an average of US$495), by cash and in kind (with an average of US$444), and by electronic transfers (with an average of US$310).[58]

An additional factor that contributed to the growth of remittances is transfer- cost reduction, due in part to increased competition from domestic and foreign companies in the United States and Mexico. Data from the World Bank’s Remittance Prices Worldwide (RPW),[59] shows that the decrease in the cost of remittances occurred mainly between 1999 and 2008, and then softened. According to figures from the Mexican National Agency for the Consumer Rights, Profeco,[60] in 1999, sending US$300 from the United States to Mexico cost between US$11.20 and US$17.70, depending on the city of origin, while in 2011 it fell by about 35% (between $6.5 and $10.7 dollars).  Table 1 illustrates these trends.[61]

 

Table 1. Average commission fee per US$300 transfer from USA to Mexico
Year	Chicago	Dallas	Houston	Indianapolis	Los Ángeles	Miami	New York	Sacramento	San José	Average
1999	12.4	12.5	11.8		11.2	16.7	11.5			12.7
2004	10.0	11.1	10.8	10.0	9.9	10.7	10.5	9.6	9.7	10.3
2009	7.0	9.0	10.4	9.4	7.5	7.4	7.5	5.9	7.4	8.0
2012*	6.3	9.1	10.8	9.7	7.8	7.6	7.8	7.6	7.6	8.2
*As of October 15, 2012.
Journal of Political Risk

Table 1. Data Source: BBVA Bancomer, “Anuario de migración y remesas,” 2013, accessed July 2, 2013, http://www.bbvaresearch.com/KETD/fbin/mult/1212_AnuarioMigracionMexico_2013_tcm346-363287.pdf.

In regard to Mexican regions receiving remittances, in 2012, 45.6% of remittances were sent to the following areas: Michoacán (9.85%), State of Mexico (8.39%), Guerrero (9.53%), Puebla (6.25%), Oaxaca (6.09%) and Hidalgo (5.49%). In contrast, the less benefited states were Baja California Sur, Campeche, Tabasco, Yucatán and Chihuahua, with less than 1% of remittances sent. The states that have experienced a more dynamic growth in remittances in the last decade have been Baja California and Sonora, while Aguascalientes and Campeche experienced the lowest growth. The majority of remittance-receivers in Mexico are located in rural communities in Michoacán, Estado de Mexico, Guanajuato, Jalisco and Estado de México, which rank the 29^th, 22^nd, 19^th, and 8^th positions respectively, out of the 32 entities in the country in the use of bank services.[62] With very low financial education, this makes mobile banking a suitable option to increase financial inclusion in areas with frequent money transfers but low infrastructure.[63]

The annual income for remittances represents one-third of the country’s Gross National Product (GNP), exceeded only by oil and manufacturing exports. During the 90s, the remittances market started to expand dramatically and peaked in 2006, followed by a decline as a consequence of the 2008 financial crisis.[64]

Remittance service providers (RSP) dominate the remittances market, which include non-bank financial intermediates (such as Western Union, Riga, Vigo or Money Gram), banks and credit unions, post offices, and informal intermediates.[65] They compete for the supply of these services that, most of the time, include cash transactions.  They tend to be expensive due to the need for agents to reach the clients and the lack of competitors in a very narrow market that is strictly regulated by the government. In Mexico, it is mandatory to have a license to work as an RSP in order to prevent money- laundering and illicit transnational activities, while other countries only allow banks to make international money transfers. Money transfer services used to be very expensive, but ubiquitous technologies have influenced the reduction of costs of transfer by electronic means or by the use of prepaid cards. New technologies have opened new opportunity windows for a broader and more competitive market.

3. The role of ubiquitous technologies: mobile financial services and financial inclusion

According to the Mobile Financial Services Development Report 2011, despite the need for credit, savings, or money transfers, the access of financial services has been limited to more than 2.5 billion people due to lack of trust in financial institutions, lack of information, or lack of infrastructure, among others.[66] Nevertheless, the use of mobile financial services and its continuing penetration in emerging countries are expanding FI, and new formal financial channels are reaching the unbanked.

As mentioned earlier, in 2011, more than 75% of the world’s population owned a cell phone, but not a bank account.[67]  Ubiquitous technologies encouraged the development of mobile money services that allow mobile financial services, such as mobile finance (credit, insurance, savings), mobile banking (transactional, informational), and mobile payments (peer-to-peer, government-to-person and business-to-business),[68] thereby improving financial networks and financial inclusion (FI).

FI has become imperative since the lack of financial services has proved to slow economic growth.[69]  Ubiquitous technologies have opened a new window of opportunity for the unbanked, making possible financial services through mobile devices to more than 2.5 billion people[70] in emerging countries where the informal economy has spread widely.  Mobile financial services address directly the needs of a majority of customers, facilitating money transfers and the use of mobile payment technologies, such as M-Pesa[71] in Kenya, Pasa Pera in the Philippines and WIZZIT in South Africa thorough the SMS technology.[72]

However, there are regulatory challenges that emerging markets still face. Regulatory issues reduce the opportunities for different agents to offer financial services through communication companies, establishing high barriers to new competitors in the mobile money market. In Mexico, regulations used to limit the possibility to offer financial services only to banks, including mobile services, narrowing competition and increasing costs for consumers. To address the lack of competition and to expand financial services, a new banking regulation from 2009 to 2011 was put in place.[73]  Its purpose was to prevent money laundering and provide a framework that would allow access within the mobile banking scheme and allow banks to open different types of accounts, depending on identification information provided by customers.

According to economist Prahalad, in a world that is technologically-interconnected, consumers who are at the bottom of the pyramid must be made active participants.[74]  FI through ubiquitous technologies increases access to instruments that can improve the lives of the people in the base of the pyramid.[75] Mobile financial services are reaching the poorest and generate high revenues for telecommunication services companies, which, in turn, become main intermediaries in these markets as they continue to expand. In addition to mobile financial services, new products are reaching more users worldwide, such as bitcoins, mobile wallets, prepaid cards, biometric ATM’s and kiosks, which can easily reach rural communities and broaden the financial system at a low cost.

Experiences with mobile technologies have been different for many countries, given that adopting new channels for financial services involves public and private sector decisions. According to the Mobile Financial Services Development Report 2011, mobile financial services development should be measured against the following standards: 1) regulatory proportionality, 2) consumer protection, 3) market competitiveness, 4) market catalysts, 5) end-user empowerment and access, 6) distribution and agent network, and 7) adoption and availability[76] that vary from one country to another.

Adoption of ubiquitous technologies for financial services has been faster in the Philippines than in Mexico, even though both countries have been working together with global FI institutions. The following sections describe both experiences and point out lessons that can be learned from their practices.

3.1 Mobile financial services in the Philippines

Despite the fact that only 26% of Filipinos have access to financial services,[77] mobile banking is being touted as a success story in the Philippines and a model for other countries to follow. The Philippines is one of the world’s pioneers in developing mobile financial services for the unbanked. Its two big telecommunication companies were some of the first to start mobile money transactions in the world, with Smart Communications introducing Smart Money in 2001, and Globe Communications offering G-CASH in 2004.

Smart Money provides its customers with a reloadable payment card linked to a SMART mobile phone. Through this service, customers use their mobile phone for remittance transfers, domestically and internationally, pay bills, receive salaries, buy airtime, and repay microfinance loans. Smart Money can also be used for paying for goods at stores or businesses using a Smart Money card.[78]

G-CASH service does not use a payment card and relies on text messaging instead. Through text messaging, customers can conduct money remittance transfers, payment of bills, loan settlements, disbursement of salaries or commissions, and purchase of products and services. Customers access G-CASH “through an SMS syntax, or a menu from a SIM tool Kit integrated in the SIM, or by a menu that can retrieve via an over the air facility that pushes the menu to the subscribers SIM.”[79]

Mobile financial services in the Philippines have attained a high level of success because the conditions for its development and take-off were already in place. A study conducted by GSMA, a trade association of mobile phone operators worldwide, identifies three factors that have contributed to the success of Philippine mobile banking: 1) positive market characteristics 2) liberal regulations implemented by Bangko Sentral ng Pilipinas and 3) actions taken by the country’s two telecommunication companies, Globe and Smart.[80]

In regard to market characteristics, the Philippines has about 96 million mobile phone subscribers out of 102 million inhabitants.[81] Filipinos are generally tech-savvy and highly “SMS literate.” The country has earned the reputation of being the texting capital of the world, with 2 billion text messages exchanged daily.[82] A 2009 CGAP-GSMA study confirms that the early users of mobile money in the Philippines are “particularly heavy SMS users, sending 57% more messages per day than non-mobile money users.”[83]

Another factor for mobile financial services success is the latent need and demand for mobile financial services, as evidenced in the existence of domestic remittance providers like pawnshops, already in full operation even before the launch of Smart Money and G-CASH.[84]

Another positive market characteristic is the robust international remittance market. As indicated earlier, overseas Filipino workers remitted about $21 billion in 2012. These remittances drive private consumption, which in turn encourages retail merchants to innovate ways to make payments quick and easy for the customer. The dispersed geography of the Philippines also contributes to the need for mobile financial services in domestic remittance transfers. In regard to actions taken by Bangko Sentral ng Pilipinas (BSP) and the country’s telecommunication companies, BSP has worked closely with them in designing regulations conducive to mobile banking.  According to the GSMA formulation,  “The BSP has contributed to the success of mobile money by: 1) enabling  non-banks to offer financial services, and in particular to 2) do so at scale through licensed remittance agents in a way that is 3) convenient and 4) commercially viable as a going concern over the long term in 5) a competitive manner.”[85]

BSP has always encouraged mobile operators to design, experiment, and “test and learn” new models of delivering financial services as an important first step as “it promotes innovation and a clear understanding of risks.”[86] Indeed, this approach has resulted in successful programs such as G-CASH and Smart Money.

By allowing non-bank agents to act like banks, BSP enables mobile money providers to expand its agent distribution network. Mobile providers can now rely on   rural banks, pawn shops, airtime sellers and money changers to reach out to customers based in rural areas that are beyond the reach of regular commercial banks.  Of course, these non-bank providers are required to apply for a Remittance Agent license to be able to conduct their business.[87]

BSP has also made it easy for customers to apply for a valid ID card, which is performed on a one-time basis only. When transacting, customers are required to present only one ID document out of a list of 20 types pre-approved by BSP. However, according to GSMA, BSP mandates that cashing in and cashing out should be done with licensed agents only (a regulation put in place to prevent money laundering or terrorist financing activities). Critics say that this is constrictive to Philippine networks compared to other markets like Kenya where M-PESA users can transact with an unregistered user on any network.[88]

With the issuance of Circular 649, BSP has contributed significantly to the success of mobile banking, which provides clear guidelines and formalizes rules on how mobile companies are going to be regulated. BSP also encouraged mobile phone companies early in the process to design and pursue different business models in order to create competition, which has paid off as the competition led to a booming mobile money market.

For their part, according to the same GSMA report, the telecommunication companies designed successful business models that made mobile banking accessible and easy to use. [89] They presented the concept of mobile money not as a value-added service but as an application that is already embedded on each new SIM card, eliminating the need to switch from one SIM card to another.  With sustained marketing efforts aimed at educating the public about the benefits of mobile banking, these companies have devised ways of accommodating customers with differing usage needs, depending on the customers’ level of familiarity with the technology behind mobile banking.

Experts also argue that another reason why mobile financial services have attained such a high level of success in the Philippines is because telecommunication companies have been smart enough to co-opt institutions such as commercial and rural banks, microfinance institutions, non-bank financial institutions including NGOs, pawnshops, cooperatives, and international institutions such as USAID. USAID has been an active partner of Globe Telecommunications in providing microfinance programs to needy Filipinos while Smart Telecommunications has been marketing its programs overseas.

Initiatives launched during the past decade by USAID set the path to the success of mobile banking in the Philippines. Through its microfinance programs such as the Rural Bankers Association of the Philippines Microenterprise Access to Banking Services (RBAP-MABS), USAID partnered with Globe Communications in implementing G-CASH that enabled micro-entrepreneurs to make loan payments via text messaging at low transaction costs. This program also helped rural banks expand their services in rural areas without additional costs. It provided a sense of security for customers who through technology need not carry large amounts of cash, or travel long distances, to deposit or transfer money.

In September 2012, USAID launched an even more comprehensive mobile banking program, Scaling Innovations in Mobile Money (SIMM), the first full-scale, mobile-money project in the Philippines designed to extend financial services throughout the archipelago. BSP reports that out of 1,635 municipalities in the country, 610 (37%) do not have access to banks.[90]SIMM requires partnerships among national and local governments, and the private sector.  According to USAID Philippines, the aim was to make available to people living in the remotest areas of the Philippines services that would enable them to send money home, save money, pay for tuition fees or unexpected medical costs, or even invest in their business using mobile phones.

With Bangko Sentral ng Pilipinas and telecommunication companies working closely together, a fertile market, effective designs and good business models, co-opting other financial institutions, and enabling regulations, mobile banking in the Philippines provides an example of a successful financial inclusion strategy that relies on an effective use of the mobile phone for financial transactions.

But there are challenges ahead. In a recent study conducted by Better Than Cash Alliance, an organization that promotes the use of electronic payments like credit cards and mobile wallets around the world, 98% of retail transactions in the Philippines are still being done in cash, whether among individuals or among businesses.[91] Despite its reputation as one of the world’s pioneers in creating innovative applications for the use of electronic platforms, the Philippines lags behind countries like South Korea where 60% of its transactions are “digitized.” The Deputy Governor of Bangko Sentral ng Pilipinas, Nestor Espenilla Jr., said that the practice of using cash creates inefficiencies in the country’s economy and a lack of transparency that often leads to corruption. With no paper trail, businesses can cook their books and avoid paying taxes. Moreover, he said, handling money is more expensive than processing electronic payments: “From producing it, moving it, guarding it and even destroying it, with cash, it’s all cost . . . Digitized money is also [easier to track]. Not only is it more efficient, it’s also more transparent … because everything is recorded.”[92]

3.2 Mexico: the road ahead

Mexico’s first approach to FI strategies was implemented in 2009, under the guidance of the World Bank. During the same year, the Mexican government became part of the project called, “Financial Inclusion 2020,” with the aim of promoting FI throughout Mexico.

In 2011, the National Council for Financial Inclusion (CONAIF) was created — a joint project integrated by the National Banks and Values Commission (CNBV), the Mexican taxation institution Secretaría de Hacienda y Crédito Público (SHCP), and other governmental financial institutions.[93]  Its purpose was to measure the use and access of banking services. The results were published through the National Financial Inclusion Survey in early 2013, which made possible identifying the lack of access and use of banks in Mexico due to geographic conditions.[94] Banks in Mexico are geographically limited because of the high costs of infrastructure, and catering to fewer people can be unprofitable. In addition, the World Bank’s Global Financial Inclusion Index  identified Mexico´s account penetration at 27.42% as very low compared with other Latin American and Caribbean nations such as Argentina (33.13%), Brazil (55.86%), Chile (42.17%), Colombia (30.42%), Costa Rica (50.35%), Ecuador (36.73%), Dominican Republic (50.35%), and Venezuela (44.11%).[95]

As a result of this low bank penetration and following the World Bank’s effort to pursue FI, Mexico created regulations for mobile accounts through the release of Circular 26/2009, focusing on banking accounts associated with a mobile telephone account. Also, this regulation covers guidelines on how to open bank accounts (requiring less paperwork) as well as regulations on anti-money laundering.

In April 2012, the CNBV, the Bank of Mexico, and the SHCP harmonized different pieces of regulation to create a new scheme of simplified accounts.  Its aim was to develop a regulatory framework that would permit a flexible regimen for operating banking products and facilitate the linking of those products to mobile phones.[96]

The first technologies introduced in Mexico for financial mobile services were targeted to bank users.[97] The use of digital technologies started with mobile banking services, which allowed users to link their bank accounts to their cell phones to complete payments or transfer money. Banking institutions developed smartphone applications to ease their usage, which means that they only consisted of improved existing channels for bank services. However, most of the unbanked individuals used low cost cell phones with reduced capacities to complete bank-related tasks. Yet with the above described regulatory framework, the introduction of easy-to-open accounts increases the number of potential users as well as non-banking correspondents.[98] It also provides greater access for the population living far from a traditional bank branch and increases the availability of funds for mobile financial services users.[99]

The low rate of bank accounts in Mexico and the high use of mobile telephones represent a real opportunity to develop mobile financial services that would satisfy the increasing needs of the people.

New technologies for mobile financial services are just starting to proliferate in the country. The first mobile money service called “Transfer,” developed by Gemalto technologies, was launched in Mexico in April, 2012 through a joint venture of two of the main banks in Mexico: Banamex-Citybank and Inbursa, and the telecommunication company “Telcel,” the most popular cell phone service company in the country, with more than 66 million users. The “Transfer” service allows money transfers of low transaction amounts, cash withdrawal, airtime purchase, account management and balance inquiry, and non-smartphone technology usage which is the SMS messaging technology. This service has a relevant impact on financial inclusion in Mexico where there are 95 million cell-phone users (out of whom only 15.5% own a smartphone).[100]

At the end of 2012, new agents entered the market, introducing similar services: “Dinero Móvil” (mobile money) by another Mexican traditional main bank, Bancomer, and Mifon by Mexican bank Banorte. Yet these services only target clients with bank accounts, facilitating cash-out transactions by SMS services.

In 2013, mobile banking impacted mobile payments, triggering competition. Banamex introduced “iAcepta” and Santander rivaled with its “iZettle” system, a mobile payment device introduced by a Swedish firm that competes with the North American “square” device that allows payments by connecting a small device into a smartphone or tablet. This facilitates money transactions in a country where 99.8% of companies are small or medium.[101] These devices are linked to bank accounts that charge around 3.5% as a commission for each payment. Also, Near Field Communications (NFC)[102] are reaching the Mexican market, but its use is still poor because of the need of smartphones in order to complete operations. It is expected to grow in the next few years, considering that by 2020 low-tech telephones will be displaced by smartphones.[103]

Mobile financial services and new technologies have implications for the growth of the amount of commercial transactions, tax recovery, and the inclusion of more citizens to the financial system. Also, new agents have become important players for the new markets and developers of newer and cheaper alternatives for money transfer and payments, such as prepaid cards, electronic wallets and mobile payment devices that reduce the use of cash and generate a more inclusive system that starts at the bottom of the pyramid.

The Mexican experience has been quite different from the Philippine experience in that Mexico started the use of ubiquitous technologies with the already banked population, particularly to smartphone users (less than 20% of the Mexican population), while the Philippines started at the bottom of the pyramid with the PasaPera system through the use of low cost devices for financial operations, which explains its rapid expansion and acceptance by the population.

3.3 The Mobile Phone Service Market in Mexico

In Mexico, the mobile phone market has grown 40% over 1996-2009, far from the 20% of OECD average. Mexico’s high growth reflects, as OECD highlighted[104] in 2012, a catch-up process starting from a low penetration rate: the minutes per mobile user (191 minutes/month in 2010) are relatively high in Mexico.

There are four operators, which offer mobile phone service at national coverage (including the Unefon brand, owned by Lusacell) listed below:[105]

• Telcel, 100% owned by América Móvil, is Mexico’s largest mobile phone company with a 70% market share and concessions to operate a wireless network in all geographic regions in the country (850, 1700-2100 and 1900 MHz radio spectrum). Telcel provides some non-charged calls, which creates difficulties for other market entrants to gain market share. América Móvil is also the leading mobile provider in Argentina, Colombia, Ecuador and Guatemala.[106]
• Telefónica Movistar, with 22% of customers and about 12% of revenue, possesses 850, 1700-2100 and 1900 MHz radio spectrum, but not in all Mexican regions. According to the OECD Report: “This has made it harder for the company to compete with Telcel. It migrated from code division multiple accesses (CDMA) to the global system for mobile communications (GSM) between 2003 and 2005. It owns one-third of Grupo de Telecomunicaciones de Alta Capacidad (GTAC) consortium, which won the auction to lease CFE dark fiber.”[107]
• Lusacell merged with Unefon, a wireless telephony operator focused on Mexico’s mass market. It offers national coverage, and integrates Mexico’s two providers of wireless telecommunications services with CDMA technology. In April 2011, “Grupo Televisa, with a 70% share of the Mexican free-to-air TV market, decided to purchase a 50% stock in Iusacell.”[108]
• Nextel, who has 4% of the Mexican mobile market in terms of subscribers with most of its customers being post-paid. This resulted in a 13% revenue-based market share. Its integrated digital-enhanced network (IDEN) technology is migrating to 3G, and provides a distinctive push-to-talk (PTT) service. It obtains its numbering resources from its subsidiary Opcom.[109]

Prices for mobile communications have improved in recent years, but are above the OECD average. International roaming prices remain also extremely high in Mexico. For example, a three-minute call in OECD countries would cost a Mexican user US$8.65, while the average price in OECD countries is US$6.76.

These high prices are unjustified by underlying costs, but reflect the oligopolistic structure of the industry and translate into extraordinary profits.  For example, in 2008, Telcel reached an EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 64%, while the average margin for mobile operators in other OECD countries was 37.6%.[110] However, these high margins did not reflect high levels of telecommunications investment. On average, the investment per total communication access was US$ 95.7 in the OECD area. In contrast, Mexico’s investment was US$ 31.5, the lowest among OECD countries.[111]

Even accounting for economies of scale and network effects that characterize this type of technology, the oligopolistic structure in offering mobile service in Mexico discourages competition, leading to higher prices and suboptimal investment, resulting in lower efficiency and less coverage. To afford international best practices in regulation, Mexico in some cases needs a better implementation of existing laws, but, in others, requires amending the regulatory framework.

As BBVA indicates, it is important to ensure low entrance barriers and “contestable” telecommunication markets in order to exert pressure on existing operators in the form of potential competition. [112]  That is, where prices are too high, service of low quality, and technology lagging, there is a potential for new operators to enter the market. Maintaining the conditions for such markets is especially important in the constantly changing telecommunication industry. These barriers can take the form of licensing or restrictions to foreign ownership, both present in Mexico.

Another aspect that needs to be addressed is the importance of transparency in regulations and their processes. These regulations should be non-discriminatory and implemented effectively.  Nowadays, many regulatory decisions are overturned by the mechanism of “amparo,”[113] overused in legal proceedings, which delays regulations designed to promote competition. In addition, the fact that the courts do not defer to the regulators or policy-making bodies is problematic.[114]

The telecommunication reform announced in Mexico in August 2013, increases the rights of users of telecommunications and radio broadcast services by making the sector a “public service of general interest. . . . it also aims to update the industry legal framework to provide better legal certainty with a single law covering services, networks and the spectrum through federal concessions.”[115]

At the same time, the creation of the Federal Telecommunications Institute and the Federal Economic Competition Commission, two new autonomous constitutionally-established agencies, the latter to replace the current Competition Commission, should help facilitate the implementation of regulatory reforms.

Foreign investment will be permitted (100% in telecommunications and satellite communications and up to 49% in radio broadcasting) and a federal policy of “universal digital inclusion” will be put in place to stimulate infrastructure, access and high-speed connectivity for broader use of digital technology throughout the country. Finally, there will be wider national coverage through optic fiber broadband infrastructure.

4.  Illegal activities and mobile telephony

Since 2009, the Mexican Central Bank (Bank of Mexico or Banxico) issued a regulation in regard to the creation and operation of mobile accounts (Circular 26/2009).[116] This directive covers the opening of accounts and its operations and anti-money laundering (AML) regulations.[117] In April 2012, the Mexican National Commission for Banking and Securities, the Mexican Ministry of Finance and Public Credit, and the Mexican Central Bank synchronized different pieces of the regulation to create a new scheme of simplified accounts in order to develop a regulatory framework that would permit a flexible regime to open banking products and link them to mobile phones:

The regulation establishes rules for consumer identification and compliance with documentation requirements to prevent money laundering but at the same time provided the flexibility needed to allow access within the mobile banking scheme to allow banks to open different types of accounts, depending on the identification information provided by the customers.[118]

This Mexican regulation while flexible in terms of streaming the complex system of opening a mobile account, also complies with the Financial Action Task Force (FATF).[119] With these regulations put in place in Mexico, two critical features trigger financial inclusion: ease of opening an account and wide coverage made possible by allowing banking correspondents to provide financial services.[120]

A FATF Guidance was prepared because financially-excluded and underserved groups might not be able to take advantage of mainstream financial service providers:

Therefore, the FATF Guidance focuses on ensuring that AML/CFT controls do not inhibit access to well-regulated financial services for financially excluded and underserved groups, including low income, rural sector and undocumented groups. It extensively explores the initiatives to address financial inclusion within the AML/CFT context taken in developing countries, since this is where the challenge is the greatest, but it also considers examples of action taken in developed countries.[121]

Mexico has made good progress in providing the FATF Plenary with progress reports on the action it has taken to address the deficiencies identified in the mutual evaluation report.[122] In the case of the Philippines, it has made significant progress in improving its AML/CFT regime.[123]

5. Synergy between remittances, financial inclusion and ubiquitous technologies

Financial inclusion policies in emerging markets are geared to supply an underserved customer base. However, because of regulatory and legal issues, the use of mobile phones for banking usage has yet to be implemented in many parts of the world. For one, overlap in the scope of regulatory oversight between the finance industry and the telecommunications industry has yet to be addressed. In Mexico, regulatory reform is moving in the right direction. The Philippines itself, despite an advantage in the use of mobile phones for financial services, still faces regulatory challenges to open its market to foreign competition. Contradictory rules governing financial transactions between donor countries and recipient countries give rise to complications and challenges.

There is high upside potential to entering the Mexican market for investors providing innovative business models that can address the still-untapped market of mobile phone and financial services in the country.  As of 2011, only 2% of the population used a mobile phone in Mexico, at least with which to check their balance accounts. The potential for this market in Mexico is high: 59% express an interest in using regular delivery systems and 46% would like to use their mobile phone.[124] In 2011 the International Financial Corporation (IFC) published the Mobile Money Readiness Index in which it defined Mexico´s readiness for mobile money as 3 (good level of readiness) on a scale of 1 to 5.[125]

According to the Annual Report 2011 conducted by Consultative Group to Assist the Poor (CGAP, a non-governmental organization based in Washington D.C. dedicated to develop innovative solutions for financial inclusion), the challenges behind Mexican mobile banking are as follows: [126] 1) banks have limited understanding of the needs of potential low-income customers; 2) banks must develop business models that make low cost, high transactional accounts viable; 3) regulation rates in deposit accounts – the Credit Institutions Act establishes that cash withdrawals from ATMs of the same bank must be free, which limits the scope for banks to develop a range of options for lower-income segments.

The Report also identifies opportunities for entering into the Mexican market: 1) the parties are proactive and open to experimentation; 2) the regulating body is highly committed and open to increasing financial inclusion; 3) the mobile infrastructure for payment and ATM systems is adequate; 4) international mobile money transfers could play a very important role as a payment method for remittances in Mexico.

Conclusion

Difficult challenges remain. Yet, the combination of remittances (capital), financial services (covering untapped market segments), and ubiquitous technologies (mobile telephony) seem to be a promising formula for spreading wealth and creating new global customers in emerging economies.

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